India’s start-ups have become the toast of the world. Investors are lining up with fat cheques, founders are spoilt for choice about which investors to sign up with, and there’s a unicorn born every third day. We are now the third in the world in terms of the number of start-ups, after the US and China. India currently has over 61,400 start-ups, with around 14,000 recognised during FY22 alone, according to the Economic Survey of 2021-22. So there’s much to celebrate about the spirit of enterprise, innovation and drive which Indian start-up founders are demonstrating.
But scratch the surface a bit, and some unpleasant facts begin to show up. Every now and again, there pops up a start-up story which projects the entire ecosystem in very poor light, and shocks everyone by the sheer brazenness of what’s on display—start-up founders going haywire with their statements, co-founders hurling allegations at each other on social media, allegations of serious financial irregularities and fraud, and more.
The latest case in point is the storied fintech unicorn BharatPe, from where founder Ashneer Grover was unceremoniously asked to go after acrimonious exchanges and allegations of fraud grabbed attention for weeks, both on social and mainstream media. Today, Grover calls himself “Own Master” in his LinkedIn profile. Grover-BharatPe is just the recent case of a very promising start-up gone astray. There was the implosion of the earlier avatar of Housing.com before this, where founder Rahul Yadav was also a part of a series of acrimonious developments leading to his eventual exit. Every now and again, stories of the lavish lifestyles of start-up founders, the cars and houses they splurge on, their behaviour and the like surface. Stories of their lifestyle are often spoken of in tones of admiration by gushing young fans whose imagination and ambition are fired up by these stories of success achieved in double quick time. And then, when some of them begin imploding, it sends shock waves down the ecosystem. What is worse, there is serious value erosion when such things happen—investors, employees, customers, partners, all suffer as a consequence of such implosions.
Let’s get one thing clear. Start-up founders, by definition, are mavericks. They are often driven by ambition, the power of their ideas, and the burning desire to grow their businesses in the shortest possible time. They aren’t an easy lot, and aren’t expected to be so either. It’s the “founder’s mindset”, the ability to go off the beaten path, the talent of doing something different which attracts investors to them, and that’s absolutely all right. Serial investor Krishnan Ganesh, promoter of BigBasket, Portea Medical, HomeLane and Bluestone, knows a thing or two about start-up founders since he has played the role of both founder and investor. Ganesh agrees that founders, by nature, are tough and investors aren’t looking for compliant people to invest in. They know the probability of success is very low, but when there is success there will be outsize profits. It’s often either 100x or nothing for early-stage funders. And that needs a special type of mindset—the founder’s mindset. They are aggressive by nature, and are able to go against the grain. What has also happened in recent times is that the average age of Indian start-up founders has fallen, and venture funding has led to very rapid growth in a very short time. Often, the pace of success takes its toll on the psyche of young entrepreneurs, and they tend to lose their way. While Ganesh agrees episodes like BharatPe and others are a wake-up call for the entire start-up ecosystem, he also puts up a strong defence on behalf of the founders. It’s just a handful of such cases which we are witnessing, while there are thousands of successful start-ups which are running very well, he tells me. You don’t stop flying because there are air crashes sometimes, he argues.
Sanjay Mehta, who is founder and partner at 100x.VC and an early-stage investor in several start-ups, agrees that episodes of founders and start-ups imploding surely affects valuations. The combative nature, a common factor among most founders, isn’t a bad thing and often is the very reason why investors come in. It’s only when this combative nature and aggression is uncontrolled that problems arise. Mehta tells me candidly that investors too need to look inward, and, while start-ups and businesses like these are typically moonshot ideas, very often it is the investors’ sky-high expectations from founders that drive them to doing things which eventually lead to the downfall of their ventures. VCs are driven by greed too.
To be sure, founders going haywire and companies imploding isn’t a new thing in the start-up world. Adam Neumann’s WeWork story—on which there’s even a television show—is a good example of how even the best in the world can come crashing down.
And herein lies the lesson. And the need for corrective action. Both Ganesh and Mehta agree that regular internal audits are essential for start-ups which are growing rapidly, so that there are internal checks and balances, and potential financial misdemeanours are red-flagged. Independent directors need to be brought in as series A and series B funding comes in, so that the outside directors can not only guide the company, but also keep a close watch on the goings on. Milestones for governance must be set by investors and the board so that governance is in-built in the company as it grows. It’s no longer kosher to hide under the label of being a scrappy start-up, as growth is now coming at double quick time. If things go haywire, the value destruction affects everybody associated with such ventures. It is important, Ganesh emphasises to me, that a mirror is shown to the founders. This apart, executive coaching of the founders is a must, as the company grows in size and becomes a bigger part of the ecosystem. Such coaching will train entrepreneurs to conduct themselves professionally, be level headed. External auditors from the Big Four audit firms are also essential, as is a whistleblower policy. Importantly, HR functions in such ventures must be sensitised to ensure there is an inclusive culture at the workplace. It’s often a toxic workplace culture that ignites many an implosion at start-ups.
As many start-ups grow and line up for the public markets, putting in place such practices beforehand will be good ‘net practice’ for firms before they access the stock markets. Public markets can be ruthless, and implosions of the kind we have seen in unlisted start-ups can create havoc for small shareholders if they happen after they are listed. It is imperative, then, to put systems and governance structures in place well in time.
A few rotten apples, it is said, can spoil the entire basket. If fast-growing unicorns, who we are busy celebrating, are allowed to grow without proper checks and balances for the founder and the top deck, India’s start-up story can turn sour as the rot spreads. The time to act is now.
The author is Editor, Business Today.
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